STATUS OF THE MICROFINANCE INDUSTRY IN IRAQ

Introduction

Support to the micro, small and medium enterprise (MSME) sector in Iraq has been identified as a critical element in the effort to improve Iraq’s economic potential.  Since 2003, a microfinance industry has been forming in Iraq as part of this effort. Microfinance has been supported and promoted by the US State Department through the Iraq Reconstruction Management Office and USAID, as well as by the US/Multinational military through civilian affairs teams.  About three-quarters of the Iraqi labor force is engaged in private sector activities, the majority of them informal sector business.  The combination of poverty, lack of formal job opportunities, extremely limited bank services and an entrepreneurial culture create intense demand for microfinance services that should remain high for the short to medium term and is likely to continue into the long-term.

There is a financing gap in Iraq.  Commercial bank lending to micro and small businesses is virtually non-existent.  Demand from the core microenterprise level of informal sector businesses is not being met by current financial services providers.  The need for additional investment in microfinance development and expansion is evident.

The Iraq Microfinance Stakeholders Summit has for the first time brought practitioners, donors, and other stakeholders together to take stock of the industry, outline the issues facing microfinance in Iraq today, and discuss donor and practitioner objectives achieved through microfinance.  The Summit is a forum for all stakeholders to frankly exchange views about the state of Iraqi microfinance and the way forward.

This is an important and appropriate moment for donors to hear directly from Iraqi practitioners and microfinance professionals involved in implementing microfinance in Iraq.  The Summit is the first step towards developing a comprehensive strategy outline for development of the industry in Iraq.

Genesis of the Microfinance Industry in Iraq

Prior to the regime change there were no identified formal sources of microfinance.  As is typical throughout the world, an informal market driven system of credit delivery through money lenders, family, friends and suppliers seemed to operate quite freely.  While such a system is generally quite efficient, it does not reach a wide number of potential entrepreneurs and is often prohibitively expensive.

In December 2003 the IFC established the Iraq Small Business Financing Facility (ISBFF).  This facility is designed to provide funding for micro and small businesses (MSB) on a commercial basis through qualified commercial banks.  However, it was found that the banks are barely functional and are also having difficulties finding bankable deals for this type of loan.  Also, commercial banks in Iraq had no experience in financing micro entrepreneurs, had not viewed microfinance as a sound profit center for their institutions and therefore did not provide a formal microfinance alternative.

In 2005, the IZDIHAR project provided supplemental funding and technical support to two US-based international NGOs that had been recipients of very large grants from USAID under the Community Action Program (CAP). In early 2006, funding for another large NGO was approved. Three small indigenous NGOs, in geographically dispersed locations, were funded jointly by IZDIHAR and the US Military.

Two of the larger microfinance institutions (MFIs) are fully operational while the third is in a startup phase with five branches and a small but growing loan portfolio.  Two of the three indigenous NGOs have experienced difficult times due to security issues but the third is progressing quite well with an active clientele and expanding outreach.

Current Status of the Industry

The following map outlining MFI locations by governance, number of loans and loan volume graphically illustrates the outreach of the formal MFI industry in Iraq today.  All of the MFIs are supported by the US Government with funding and technical assistance.

Outreach of the Microfinance Industry in Iraq

Currently there is a very limited supply of microfinance services; the existing NGO programs serve a combined total of 15,000 active loan clients.  Commercial bank lending to micro and small businesses is virtually non-existent with banks targeted towards high-end small businesses at the lowest level and international firms as the client of choice.  Demand from the core microenterprise level of informal sector businesses is not being met by current providers.  Most professionals believe there is a financing gap and need for additional investment in microfinance development.

All of the existing MFIs are challenged not only by an ever changing security situation but also by an immature policy and regulatory system, donor pressure for action and reporting, and the acquisition and retention of qualified personnel. While loan repayment is generally quite good – in most cases excellent – operating efficiencies are eroded through loan portfolios priced below market rates and the cost of security.

Despite the obstacles, donors and NGOs alike continue to move forward with plans for expanded services and locations and are continually adjusting as conditions change.  Training programs offered by internationally acclaimed training institutions are not only turning out qualified microfinance professionals, they are also developing a cadre of Iraqi trainers through a Training of Trainers program.  Proven software programs specifically designed for smaller MFIs will soon be installed in the three indigenous institutions adding to the framework for continued development of the industry in Iraq.

The Way Forward

There are no precedents for donor and microfinance professionals to draw on for development work in Iraq.  Experiences in Afghanistan or Bosnia are often cited, but there is no real comparison between them and Iraq.  One person starting his second one year tour with the Corps of Engineers was overheard saying “this is like trying to implement the Marshall Plan in 1944”. Still, we are charged with the task of designing systems and implementing programs that will result in an effective and viable microfinance industry that will be a significant player in the economic growth of the nation.

So, what is the way forward?  Where should we direct the microfinance industry given the unique conditions of Iraq?  Our purpose with the Iraq Microfinance Stakeholders Summit is to put our best effort to the task of mapping the future of the industry in a fashion best suited for – most importantly – the economic enhancement of the Iraqi people and to provide a framework upon which donors and microfinance professionals can build a strong and lasting microfinance industry.

Back to Top